Facebook (FB):  FB shares soared off recent lows after the company reported 1Q22 results and issued updated guidance.  The stock had fallen about 50% since last summer and was trading at pre-pandemic levels heading into the report.  This is a good example of how expectations play a huge role in short-term stock price action.  FB’s multiple had collapsed to where it was trading in line with legacy media companies indicating investors felt the company’s recent issues were the trigger for a secular decline in the business.  This is somewhat understandable given competition from TikTok, Apple’s ongoing crackdown on privacy, and increasing regulatory action by governments all around the world.  The highlight of 1Q22 results was a pickup in daily active users of Facebook and Instagram and signs of significant engagement at Reels (FB’s TikTok copycat services).  These two items cut against the bear argument that the company is at the start of a secular decline.  Further helping the stock was management’s much more focused and realistic tone on the conference call.  A clear statement noting that expense growth would be aligned with more uncertain future revenue growth rates was reinforced by a cut in the company’s operating expense growth guidance.  The entire call was more confident and less defensive than the last quarter which triggered most of the drop in the stock price from all-time highs.  As long-time followers of media companies, we strongly disagree with the idea that FB should be valued similarly to legacy media companies like Paramount and Warner Brothers Discovery.  We expect FB growth to pick up later this year as comparisons ease, efforts to offset Apple’s privacy moves gain traction, and monetization of Reels begins. A target of 10X 2023 estimated EBITDA gets the stock back to $250.  Should growth rates improve to the mid-teens on a long-term basis, our target multiple can easily go higher with the stock recovering to $300 over the next 12 months.

Comcast (CMCSA):  CMCSA has been a poor performer since peaking last September at over $60.  The shares are down by 1/3^rd since then.  What might surprise Northlake clients is that analyst estimates for the company’s revenues, EBITDA, free cash flow, and EPS are virtually unchanged.  Revenue, EBITDA, and free cash flow growth forecasts remain at mid-single digits annually with EPS growing 10-15% as free cash flow is used to buy back shares. In September, CMCSA shares traded at 17X 2022 estimated EPS.  Today, the P-E multiple is just over 11X.  As we pointed out in Part One of our 1Q22 earnings recap, the market multiple has fallen about 2 points.  The incremental decline in CMCSA shares is due to dramatically slower broadband subscriber growth.  Broadband growth is the key driver of financial results in the company’s cable segment that accounts for 2/3rds of EBITDA and the bulk of free cash flow.  The causes of the slower growth include (1) historically low household formations and moves, and (2) competition from wired and wireless broadband from the major wireless companies.  At current prices, CMCSA shares are assuming little to no growth, trading at multiples in line with the much slower growing wireless telcos and the traditional media and entertainment companies that face secular decline.  Northlake missed the opportunity to sell CMCSA shares at a higher price since we felt the valuation was too low.  At this point, we think the shares are too cheap to sell given the strong balance sheet and dedication of huge free cash flow to dividends and share repurchases equivalent to upper single digits of the company’s market cap each year.  To get moving upward again to our revised target in the low $50s (down from $56), CMCSA must disprove the negative that broadband revenue and earnings growth will slow from price competition.  We have confidence the industry will grow but it is going to take time and a sharp rebound in the next several months seems unlikely.

Apple (AAPL):  AAPL reported good results for the March quarter but the shares reacted negatively to guidance for the June quarter.  For several quarters, AAPL has called out supply chain issues that lead to an inability to meet demand for the company’s products.  iPhones have largely been spared thus far with iPads taking the biggest hit in the March quarter.  Management warned of an additional $4-8 billion in lost sales in the June quarter across most product lines.  The COVID surge and crackdown in China is at fault although management also noted that there has been some improvement in April.  Northlake is less concerned about this issue as there are no signs that demand for iPhones, Macs, iPods, Apple Watches, and Air Pods are slowing.  The Services businesses that are built off the large and still growing base of hardware products had another good quarter even though growth is beginning to normalize.  We expect further slowing consistent with management guidance but growth should remain comfortably above 10% and enhance the company’s overall growth.  Services carry very high gross margins and with services now 20% of total revenue, AAPL’s profitability has moved structurally higher.  AAPL shares have held up better than most growth stocks, most likely due to the signs of strong underlying demand for the company’s products and services.  The shares are vulnerable to same macroeconomic worries that have buffeted the market and the P-E multiple remains elevated.  In turbulent markets, AAPL’s financial strength is a major positive and the company raised its dividend and issued a new $90 billion share buyback.  We still find AAPL shares fully valued but also remain willing to hold and let earnings growth catch up.

FB, CMCSA, and AAPL are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.